How to lower your corporation tax bill
There are a number of ways to reduce the amount of corporation tax you pay, some of which we’ve detailed below:
Expenses
This may seem obvious, but it really is the easiest way of reducing your corporation tax bill. The rules are simple: you can claim for any legitimate business expense that is necessary for the business, and which is used wholly by the business.
In practice, this means keeping track of every pack of paperclips, bus fare, and train ticket. They’re all deductible (i.e. you can take away the cost from your overall profit for tax purposes).
Buy a mobile through your company and you can also claim your phone bill, as well as mileage for any business vehicles, and the cost of any professional insurance. If you have employees, then make sure you also factor in the cost of their salaries and national insurance contributions.
Salaries
Speaking of salaries, make sure you pay yourself one, as this is also tax deductible. However, it will be then be added to your personal tax statement and be eligible for income tax, so whether this is the right choice for you will depend on whether you have other sources of income.
You also need to carefully consider what level of salary to give yourself, as taking too much could push you into a higher income tax band. You can also pay dividends to shareholders (who, in the early stages at least, would be you and any other directors).
These are liable for dividend tax, but there is a tax-free allowance for this. Therefore, the most tax-efficient way to take money out of the business for yourself is likely to be a combination of a relatively low salary and dividends. Consult a tax expert for detailed guidance on this.
Pension payments
This one is a win-win. Pay into a pension pot through your company and you’ll not only be putting cash aside for your retirement, but you’ll also be able to deduct this amount from corporation tax. This is much more tax-efficient than withdrawing the money from your company and then paying into your personal pension, as you’d have to pay tax on the money withdrawn.
Annual Investment Allowance (AIA)
The AIA is designed to encourage investment in new equipment. It works like this: if you purchase equipment for your business (meaning anything from diggers to a new office printer), then you can deduct this cost from your corporation tax profit, thereby reducing the amount of corporation tax you pay.
The maximum amount that is deductible through the AIA varies – at the time of writing, it’s been temporarily increased to £1m (up to 31 December 2020), but it stood at just £200,000 from 1 January 2016 to 31 December 2018.
More guidance on what is and isn’t eligible for AIA is available here, but the primary exception is cars (vans and lorries are allowed, however). Business cars are eligible for writing down allowances, which deduct a percentage of the value of the item each year.
Tax reliefs
Tax reliefs work in a very similar way to the AIA – they’re designed to encourage investment in particular areas by allowing these expenses to be deductible for tax. Depending on which industry you operate in, a variety of reliefs are available, but one of the most widely used is research and development (R&D) tax relief.
More detail is given in this HMRC guide, but the basic idea is that investment in “work that advances overall knowledge or capability in a field of science or technology, and projects or activities that help resolve scientific or technological uncertainties” can be written off for tax purposes.
This covers both scientific research and design/engineering work that aims to overcome difficult technological problems, but does not cover pure product development that doesn’t make a significant contribution to scientific or technological knowledge.
Other reliefs available include:
Paying early
As mentioned earlier in this guide, HMRC will pay you 0.5% interest on the amount of corporation tax paid by your company if you pay before the deadline. This is paid from the date you pay to your corporation tax deadline, with the earliest date HMRC are willing to accept being six months and 13 days after the start of your accounting period. It also gives you one less thing to worry about, and helps you focus on your future investment plans.
via https://www.AiUpNow.com/ by Alec Hawley, Khareem Sudlow
